A £1.4bn coalition scheme to boost the economy has failed to achieve value for money, spending as much as £200,000 generating a single job, according to the government's official auditors.

The regional growth fund, launched nearly two years ago to support business in depressed areas, could have created thousands more jobs if the government had applied tighter controls, a report from the National Audit Office (NAO) has found.

The damning verdict could embarrass David Cameron and Nick Clegg, who praised the initiative when they visited Essex earlier this week. Clegg previously claimed that the fund could generate up to half a million jobs.

The NAO report estimated that 41,000 extra jobs could be created in the next seven years as a result of the scheme – but the taxpayer would have received much better value for money if bids had been more closely scrutinised.

"Over 90% of the net additional jobs could have been delivered for 75% of the cost, with the cost of each job then being £26,000," the report said.

"The cost per net additional job supported by the fund varies from under £4,000 to over £200,000."

The NAO stated: "Value for money was not optimised because a significant proportion of the fund was allocated to projects that offered relatively few jobs for the public money invested.

"Applying tighter controls over the value for money offered by individual bids would improve the fund's overall cost-effectiveness.

The report suggests civil servants should be allowed to step away from assessing less profitable projects to concentrate on getting new projects under way.

"Officials' time freed up from post-appraisal checks on projects where public money is providing fewer jobs could be spent on getting other projects up and running more quickly.

"Such an approach provides the prospect of better value for money and faster delivery from the further £1bn allocated to the fund in the chancellor's November 2011 autumn statement," auditors said.

The shadow business secretary, Chuka Umunna, said the NAO's verdict should provoke a rethink of the government's regeneration strategy. "It speaks volumes that the government's flagship growth policy, the regional growth fund, has come in for such criticism today from the National Audit Office.

"While Nick Clegg said the fund would lead to half a million jobs, the report forecasts that it will create only up to 41,000 jobs.

"The deputy prime minister also said that the fund would help rebalance the economy, yet the report says it is still unclear whether it has contributed to regional rebalancing," he said.

The business secretary, Vince Cable, defended the scheme. "We have already put in place some of the NAO's recommendations such as making more administrative resources available, which means projects are being processed even faster."